While Netflix is not yet giving out a lot of details on their costs associated with their streaming video service, they have given out enough data for us to have a pretty good idea of their costs when it comes to their streaming delivery costs for the Xbox 360 and other devices. Here's what we do and don't know and how it all breaks down.

We know that the average encoding rate for video streamed to the Xbox 360 is about 2000Kbps. That means one person watching a two hour movie would transfer roughly 1.8GB of data. For high definition movies, the average encoding bitrate is around 3200Kbps and one user would transfer about 3GB of data. Based on the high volume of movies Netflix is doing each month, they are getting a very good rate in the market. I estimate they are paying on average about $0.03 per GB delivered across Limelight and Level 3 and potentially have even a slightly lower rate.

Based on the three cents per GB assumption, that means it would cost Netflix about $0.06 to deliver one SD movie and $0.09 to deliver one HD movie. Those numbers would be about 25% lower if the length of the movie were ninety minutes instead of two hours. It would also be a little lower or higher depending on the exact bitrate since some movies are streamed higher and some lower and Netflix only has about 400 movies available in HD. Taking all that into consideration the average cost to Netflix to stream to the XBOX 360 is about five cents per movie. Streaming to the PC is a lot cheaper, about half that cost, as the bitrates are much lower.

Based on those numbers, their streaming offering looks like it would save them tons of money and make them a lot more profitable since Netflix spends about 78 cents out and back for standard pre-sort first class mailing of their DVDs. But the one problem is that these streaming costs do not yet include the licensing costs from the content owners. It's the costs associated with licensing the content that really makes or breaks their streaming service, not the cost of bandwidth.

I don't know what Netflix is paying to license content and many of their licensing deals are all at different prices. In other online video offerings I have seen content owners charge a one-time flat fee per video, a fee each time the video has been watched, a one time licensing charge for a specific number of plays or many various other licensing models. I've seen licensing costs as high as $4 per movie, per play, and I've seen pricing on the other end of the spectrum at a few pennies per play. That's why many of the content licensing deals Netflix has in place are a one time cost no matter how many movies are watched. While that works great for Netflix today, most of those licensing deals are not with major studios for first-run content. It's also interesting to note that Netflix's recommendation algorithm takes into account which movies have a cheaper licensing cost and makes those movies show up as recommendations more often.

One of the major reasons that Netflix does not have a lot of new content in their streaming offering is the fact that the licensing costs for new content is so high. Studios are still greedy and Netflix simply can't afford to pay the costs associated with first run movies. Netflix's CEO had said many times that they are going to spend a lot of money this year to license content where the costs are "reasonable". That comment goes to show that much of the newer content is simply out of reach for Netflix, as well as others and that studios simply want too much cash. Over time, you would think the studios would get on board with this and license some newer content faster, but so far, they don't seem to want to. At some point, one of the major studios is going to break from the pack and give it a shot and test the waters, making it affordable for Netflix to offer some newer, first-run content. But right now, the studios think they don't need Netflix.

I would not agree with that, but looking at the penetration rate Netflix has, it is very small. Netflix has ten million subscribers and while they and Microsoft said last month that "1 million Xbox LIVE Gold members have downloaded and activated the groundbreaking Xbox LIVE application from Netflix", they didn't say if those are paying Netflix members. With 48 hours free trail cards showing up in Xbox 360 games, we don't truly know how many paying customers are using the service. And as of January of this year, Microsoft had sold 11.2 million Xbox 360 consoles in North America. (Source: NPD) So if the penetration rate is only one million today, it's going to take years before it truly scales. And that's really what the movie studios care about, a large audience. I think it is short-sided thinking on the studios part, but I don't think anyone would disagree with me if I said it's not the first time the studios didn't get it.

But the question remains, what is the total cost to Netflix to stream a movie? For some content Netflix has today, it's clearly cheaper than mailing out a DVD, but for other content, it's still more expensive based on the licensing costs. And with all the talk lately of Netflix wanting to some day offer a streaming only service, probably this year, running the numbers for such a service does not make a lot of economical sense. Lets say the average cost to stream and license a movie is $0.50. All it takes is one user streaming ten movies a month and Netflix's cost is five bucks. And with their cheapest DVD offering with unlimited streaming being $8.99 a month, how much can Netflix realistically charge for a streaming only service? Maybe $5.99? So far, the economics of a streaming only service don't work unless Netflix can get very good licensing terms and hope that users who don't stream a ton of movies each month make up for the ones that do. At this point it's a guessing game, although Netflix is already compiling some great data on what users are doing with streaming and what their consumption habits are.

For now and some time to come, Netflix's streaming service is not going to generate revenue. Yes, Netflix does expect it to help retain customers and if that is all it does, that alone is worth the cost. With Netflix's churn being 4% last quarter, anything that helps keep churn down from their core business is very valuable and can generate a return. While Netflix said it spent around $40M for their online video offering in 2007 and most folks I spoke to said they thought Netflix spent twice that last year, clearly it appears as if Netflix is ramping up to spend close to $100M in 2009.

The key thing I think people are missing is that Netflix's streaming service is not a substitute for their DVD business; it's a complement to it. Over time, many years from now when broadband enabled TVs and Blu-ray players get some install base, things may change. But for the next few years, Netflix is not going to make money from their streaming service unless the financial benefit comes as a result to their core business.

That said, what Netflix is doing is exciting and I love the streaming service on my Xbox 360. Netflix is laying the ground work for the future and it's going to be really fun to see where they take this service a few years from now. We're all keeping a close eye on the financial impact streaming movies could have on their overall business. Studios, give them a chance! License some decent content already.

Dan,
Great piece of writing. One thing is for sure. NetFlix is pioneering the use of Silverlight DRM in the marketplace and definitely clearly demonstrating the value of the product on both the PC and Mac platforms.

Sam Ratha

Dan, this is exactly why I read your stuff. I don’t see anyone else trying to figure out the business side of these offerings like you are. Thanks for not just re-hashing what everyone else is writing about and actually giving us something to think about. Keep them coming.

Fagin

Dan, What would the operating profits be for Netflix if they had ad support?

No idea on the ad support. We don’t have any details yet on the consumption of the service, other than the one data point from Netflix and Microsoft on the first three months of streaming on the XBOX 360.

Ad support? No way NetFlix is going to take a 10 year step backwards. They _sell_ access to content. Not access to bad ads that don’t return anything but data about web users that don’t click out and don’t buy. The time for ad-supported media has past.

Why wouldn’t Netflix go ad supported? If they do it behind a subscription gateway, they look at *lot* more like an MSO (Subscription + ad supported).

Tim

Wonderful post, I personally had netflix for a couple of years and when they started using the idea of streaming, it is an excellent addition to their snail mail service and yes they may not make money right away, but I think they see the future and are on their way.

Fagin

Netflix could possibly tier the Ad support with the basic sub, Ad revs could go direct to the licensor for first release content,
Netflix could also shave a cut for themselves.
The Ads will need to be a set-format though, once you start mixing the Ad times and aspect ratios then you start down a slippery road.
They will need to man-up soon though, befor diffusion sets in.

Suds

Dan, In your estimation have you used streaming rates or HTTP rates for content delivery?
As you know Netflix is using adaptive streaming over HTTP. If they did traditional streaming would their cost have been higher?

Hmmm, Thanks for the clarification. But it raises another question for me.
From what I have heard, CDN’s need to have a separate network for streaming since the streaming servers sit at the edge & they need a different set of operations folks compared to the HTTP network.
So do you think most CDN’s are absorbing the additional operational cost of streaming compared to deliverig video over HTTP which can get cached & uses the same operations folks?

They don’t need a separate network, but do use separate servers. While some say they need different support folks, I don’t buy it. Any company who offers multiple products and services has product managers and support people who focus on specific products. That’s the cost of doing business if you want to offer the service.
Also keep in mind that most video is not “cached” on lots of HTTP based servers. Yes, CDNs can leverage the wider footprint they have for HTTP over streaming, but most of the HTTP boxes for caching are setup for small objects, not large ones. The idea that every customer on a CDN has all of their video content cached, on all of that CDNs infrastructure is not the case.

This is very interesting analysis. I run http://feedflix.com and so far this year, Instant Streams from Netflix have outpaced traditional DVD shipments (Graph @ http://feedflix.com/dvd-vs-instant). For instance, we’re less than a quarter of our way into 2009 but already, total titles streamed is already more than half of what it was in all of 2008.

Hi Raghu, it’s interesting data, but I don’t think we can use it to confirm any trend. As you say on the site the data “is based on a small sample of the Netflix subscriber base” and you could not stream Netflix content to the XBOX 360 until 11/08 so there is no historical data to review from prior years when the service is only five months old.

Why would NetFlix go backwards in their business and take a product they sell and charge people to view and suddenly just give it away with Ads?
Look around…. Ad-supported movie plays… how many of those do you see in the marketplace???
Subscription may not work because of the littany of royalty issues and the fact it probably just isn’t a profitable business model as it relates to movie content.

Does netflix pay a licensing to studios to rent DVDs? If I remember right, they do. I wonder how that licensing fee stacks up to the the streaming fee…
Also, here’s another financial costs perspective to parse out: what’s the average end user cost for the convenience of getting streamed netflix?
I have an Xbox, which I had regardless… but I’d say at this point about 60 percent of it’s life has been dedicated to netflix. I have zero interest in online gameplay, so essentially all of my 50 dollars a year of my gold membership is for netflix.
I have a 20 mps fios fiber optic connection, but if I DIDN’T have netflix, I’d probably go down to the next tier; 5 mps. So the additonal is like 20 extra buck a month. (I’m sure the brave new world of metered bandwidth is really going to play havoc).
So anyway, for me, my expense to have a decent netflix streaming option is basically about 400 dollars a year (I’m sort of pro-rating and amortizing the cost of the xbox). I actually watch a lot of stuff on netflix, but I’ll bet it averages to about 7 hours a week, which means that I’m spending about 1.30 a day on netflix (including the 8.99 to netflix).
Which actually sounds like a pretty good deal when I look at it this way, but it actually sounds terrible when I look at it long term and say I’m spending 400 dollars a year, especially when I get frustrated about the lack of premium content.

Great article. I was wondering how much it costs them to stream to us. As far as a comment or two above, definitely the first-run movies aren’t there, but I’m getting to watch all the MI-5, Law & Order:Criminal Intent, Doctor, Who, etc. television series I want. I also just noticed the 3rd season of The Tudors is available right now. Not new as in just out in the last couple of weeks, but pretty darn new to me. I enjoy the online gaming with Xbox Gold, so honestly, the low cost of Netflix for me almost makes me feel like I’m stealing something from them.

Great insight as always dan. The other thing issue with streaming is that there isnt a queue. Netflix gets breathing room since most people have a finite number of DVDs available to them at any one time.
When a DVD isnt available, the user waits or substitutes something available. Both of which buy time and reduce content licensing costs.
With unlimited streaming, particularly if they pay per use, and that use is defined as some number of minutes per movie/tv show, then the costs per user per day can sky rocket.
They could be paying a licensing fee for 3,4,5, X number of shows per DAY. Particularly if someone is using this as a replacement for cable. Thats when and how they get killed on this.
They still have to do it and its a great service, but as you say, they REALLY have to hope that people who are light users balance the heavy users because heavy streamers will cost them much more than heavy DVD users.

Tom

As Rodney said in “Back to School”, you left out a lot of stuff. What about fixed overhead costs that Netflix has that must be added to each stream? Rents, equipment leases, utilities, and salaries must be added to the cost of downloading. What about amortizing R&D for this streaming? This is all business 101.

additup

Do you mind sharing your math on the $.03 distribution cost? I can’t get to that # even with the cheapest wholesale guys….

I didn’t say their distribution cost was $0.03 so not sure where you came up with that number? If you mean the $0.03 per GB cost I listed, that cost is for transfer per GB, not per movie. Each movie takes up a couple of GB.

additup

Sorry transfer across packet is what I meant – $.03 per GB seems awfully low.

Great site this blog.streamingmedia.com and I am really pleased to see you have what I am actually looking for here and this this post is exactly what I am interested in. I shall be pleased to become a regular visitor 🙂

Allan

Dan, I have troubles with repeating your math. 2 hours full-length movie is 7200 seconds. 2000-3200 kbs equals to ~14 GB of data which is 10 times more than indicated by you. If this is correct then the cost calculations will also be thrown out of window. Where did I make the mistake?

Hi Allan, a 120 minute movie encoded at 2000Kbps would transfer a total of 1.77GB. I rounded it off to 1.8GB. An easy way to do the math on things like this is to use one of the many streaming calculators on the web. Just go a Google search on “streaming calculator”. I have an Excel spreadsheet I use, but many of the calculators online work just as well.

Amit

Dan, I am still not clear on the licensing front. You said that average cost of licesning and streaming movie is 0.50$. Can you throw more light on the licensing the content streaming and how is it shaping up in this digital entertainment industry ?

Jake

While it may seem like a step backwards, ad supported streaming content probably isn’t totally out of the question with Netflix. Ads appear in their DVD mailers, which although is quite a different animal, movie-goers are now quite used to seeing ads even after paying $8 and up for a movie ticket.
However, I believe you are right in that streaming will most likely remain as a method to augment their core business. Fantastic article.

C

I have seen a contract that suggests netflix does profit sharing with the studios

Hamida Nafaa

Hi Dan, all. Thanks for the insightful post and comments.
Any ideas who is the technology provider for Netflix? I mean who does the CDN integration for them?
Looks like they are using Silverlight as streaming platform and Level3 as CDN provider, but I couldn’t figure out who is developing the solution for them, is it an RTSP over HTTP solution, etc,

Not sure you properly understand studio windows and contractual limitations associated with existing pay TV deals. It will be a long time, if ever, before studios are able to distrbute first run content in a subscription service digtitally. Physical only works because of the first sale doctrine associated with physical products (i.e., after I buy a DVD, I can resell or rent it). Digital subscription is a later window than pay TV. Only exception is Netflix’s deal with Starz that allows them to offer movies in the Starz windows (Sony Pictures content, etc.), but that’s still during the Starz window and no guarantee that deal stays in place. Netflix is unfortunatley not the future unless it gets acquired and can offer the studios gigantic advances that match the pay tv deal guarantees. Sorry, Netflix lovers.

Dan;
When you say!!
“While Netflix said it spent around $40M for their online video offering in 2007 and most folks I spoke to said they thought Netflix spent twice that last year, clearly it appears as if Netflix is ramping up to spend close to $100M in 2009.”
What exactly are you referring to? The overall cost for their streaming side of the business.. or licensing rights to their current film offering?
Thanks in advance!!! & Great site BTW!

Hi Michael, yes, those numbers I quote include both the costs to deliver the content AND license the content.

vicki

Dan, just one question. Can you please tell me what to do to stop this buffering problem with Netflix? I have narrowed it down to what is NOT causing this problem. It is NOT my service provider, it is NOT my computer, it is NOT running multiple programs while trying to watch a netflix movie. The only reason I ask you is because I stumbled upon this blog trying to research what is wrong wtih movie watching instantly on netflix and I though the answer would have something to do with money and streaming.
Thank you for your help

I stumbled upon this article from google search after so many clicks of links which have no use to me…. I read everything of this article including all comments. I have got all what I was searching for in this article… I will spend some more time reading some of the other articles available in this web site.
Even though I am not paying for this article I offer you many thanks and my appreciation. Thank you

Jack

Your math is absolutely incorrect and so is your GB price for delivery. The best anyone is going to do is $10/mbps of bandwidth. Which equates to about $.30 per GB delivered. That does not take into consideration the cost to serve that stream, which is often 2x the bandwidth cost on a monthly basis.
3.2Mbps streaming HD movie uses 11,500MB per hour. or $35.40 at $.03 per Gb. Realistically they are streaming at 800k which would cost $8.64 per hour.
YouTube, HULU and Netflix all have the same losing $ fate when it comes to delivering video until they take out the CDN who are making all the $$$$.

Jack, about six months after I wrote this post, the CEO of Netflix said on an earnings call that it cost them “about five cents” to deliver a movie. So the math is not wrong and the numbers are not wrong. Also, I gave out pricing based on a per GB delivered model. You are talking about pricing on a per Mbps sustained model, which is not the same thing.
And Netflix has given out all of their encoding specs on their own blog, in detail. So the 800Kbps number you list is incorrect. You mention Hulu, yet they just announced a few weeks ago that they were profitable.

Christopher Cooper

Hey, I just came across this site while doing some research and I love it. THANKS FOR ALL THE INFORMATION. I can’t even tell you how useful this will be… You made me a very rich man. Thanks

Q

Complement–not compliment.

Cy Cabell

A question was broached in this article, “How much can Netflix realistically charge for a streaming only service? $5.99/mo?” I’m currently paying $9.68/mo for my Netflix service now. I think since we started I have ordered less than a dozen DVDs, but I have watched dozens of streaming movies. Honestly, if I could have access to everyone of the thousands of titles that Netflix offers, I’d be willing to pay $15/mo or even $20/mo. Think about it, $20 per month to have any movie title in the Netflix library–now that’s a deal! Just hope the studios figure this out!

I stumbled across your site and I am very interested in your comments. I work at a public community college that is non-traditional. We have no campus and 40,000 students online and another 230,000 in our college system.
I have been trying to gather information about streaming video to provide movies to our students. I do not have a problem with the licensing fees, if I can just find someone who would help me.
Do you know anyone I could talk to about this? I have talked with Swank, Residence Life, Blockbuster, Netflix, Criterion Pictures. All to no avail. Is this because of the studios?

Free2Watch All Movies Online

netflix is far of a simple streaming service. in my oppinion netflix is the best service i ever used and i am very satisfied with it.

I think some of the folks doing the math are confusing gigabytes and gigabits, megabytes and megabits or kilobytes with kilobits. There is a big difference and not the same. Roughly a factor of 8 give or take. Basically divide by 8 for aprox. People do this all the time with their internet speeds too. They think a 8mbps/8000kbps connection should download at 8000 kilobytes per second for some reason. I think the math in this article is pretty close and sounds ball park.
Anyway what I keep wondering is how can they afford to pay all their employees as well and still maintain and report profits like they do?
Maybe some is outsourced for cheaper, but they do have plenty of u.s. distribution centers for the dvd mailers.
The profit per average customer can’t be that much. I am guessing they hope people do not stream many movies in a month, and same with the dvd mailers. The ones that are not as active hopefully make up for those that do.

Ben

@ Alan: When kb is written it means kilo[bit] which is smaller than a kB which stands for a kilo[byte], so actually the guy is correct in his calculation.

Very interesting and well written article. However, as a film producer I wish it would have been a bit more even handed. As an independent producer I am often at odds with the studios, but honestly Netflix operates just as onerously when it deals with indies. If they offered a fair deal regarding streaming, lots of independents would consider it. Treating indies poorly while doing rich side deals (DVD rev share) with studios doesn’t seem like a departure, rather following the studios step for step. Interestingly enough, YouTube offers indies a rev share for streaming on a per rental basis, seems much more democratic and certainly creates good will with the indie producers. Thanks again for the stimulating article!

Their stock prices continues to climb.
I wonder how many movies the average uses watches per month.
Anyone have new information on the Netflix structure

Mark Douglas

I agree with the others Dan, totally excellent writing! I am not really involved with any of it, but so impressed with your brevity, clarity and depth of thought. I am so well informed after a brief read.

chris

“how much can Netflix realistically charge for a streaming only service? Maybe $5.99?”…i guess we see the toll inflation has taken over the last 2 years..article should be updated since the price hike

Stephanonymous

The price for streaming is higher because naturally people are able to stream more movies per month than they are able to get via snail mail, since there is no wait time involved with streaming. So it’s unreasonable to expect Netflix to be able to offer a streaming-only service with a large selection of movies for under $10 a month. But am I alone saying that I would be willing to pay significantly more per month for such a service if it did in fact exist? Maybe as high as $30 a month for a streaming service that included their full catalog of movies. Doesn’t seem unreasonable to me. The internet has breed a generation of people who expect instant gratification and admittedly I am one of them. If I get the itch to watch The 40 year old virgin tonight, I don’t want to put it in my queue and wait for it to show up at my door in a couple of days. I want it tonight. So I still find myself going to blockbuster several times a month even though I have netflix. A full-streaming service would save me that expense. The movie rental business is moving towards streaming-only, it’s just a matter of when movie studios and rental services will start working together to give the consumer what they want rather than stubbornly holding on to a business model that’s dying.

Cristobal Krusen

Do you have any idea what NetFlix pays currently to license an indie feature?

Wrote in 2009: “Over time, many years from now when broadband enabled TVs and Blu-ray players get some install base, things may change.”
It´s 2012 and broadband enabled TVs are pretty common now. I have one and Netflix is there. 3 years… Not so many years 🙂

Hi Daniel, actually, based on sales data, broadband enabled TVs and Blu-ray players are not common at all. There are still very few being sold when compared to the total number of TVs. And then you have to cut the sales number in half, because that many of them aren’t even connected.
So we are still many, many years away before they are mainstream. Simply looking at the sales figures and projected sales figures is real proof.

Daily posts by Dan Rayburn about the online video industry, business trends & analysis, market data & research as well as the online video business models in the media & entertainment, broadcast, advertising & enterprise industries.